In the good books

Amcor Limited (AMC) Upgrade to Buy from Neutral by Citi and Upgrade to Outperform from Neutral by Credit Suisse B/H/S: 4/3/1

Citi analysts had been reducing their estimates on the belief foreign exchange headwinds and emerging markets turmoil would impact negatively, but they were proved wrong with Amcor releasing better-than-expected financial numbers in its interim report. The analysts have been forced to reverse their earlier actions and have now upgraded the stock. First half results also positively surprised Credit Suisse. The broker upgrades the stock on the back of a better fiscal 2016 results more favourable exchange rates.

Domino’s Pizza (DMP) Upgrade to Add from Hold by Morgans B/H/S: 2/4/0

First-half results were materially ahead of Morgans’ forecasts. The broker upgrades earnings estimates by 7.2% and 8.0% for fiscal 2016 and fiscal 2017 respectively. The level of growth at Domino’s is unrivalled in the broader retail sector, Morgans says and this supports the stock’s premium.

Magellan Financial Group (MFG) Upgrade to Outperform from Neutral by Macquarie B/H/S: 3/0/1

The broker says the numbers behind its interim results speak for themselves: 41% increase in profit, 38% increase in dividend, exceptional net inflows and a reduction in employee expense to income. The broker has also significantly lifted earnings forecasts.

Pacific Brands (PBG) Upgrade to Buy from Hold by Deutsche Bank B/H/S: 2/3/0

First-half profit was ahead of Deutsche Bank’s estimates. The broker believes management has been successful in turning the business around to date. The structurally challenged wholesale business appears to be reaching a stable position while the push into retail highlights the potential of the company’s flagship brands.

Primary Health Care (PRY) Upgrade to Neutral from Underperform by Credit Suisse and Upgrade to Neutral from Underperform by Macquarie B/H/S: 1/7/0

First-half earnings were in line with forecast. Credit Suisse envisages several catalysts to improve the company’s capital position, including a potential tax refund and lower dividend payout. This is dependent on a recovery in operating cash flow, the broker acknowledges.

Primary’s result fell short for Macquarie. Pathology showed improvement as did doctor recruitment and retention but the company is still facing a number of regulatory and operational challenges which will place pressure on growth, the broker notes.

Improved cash flow and the dividend cut reduces the risk for a capital raising and Macquarie believes the current share price sufficiently captures regulatory and operational risks.

In the not-so-good books

CSL Limited (CSL) Downgrade to Neutral from Outperform by Credit Suisse and Downgrade to Hold from Buy by Deutsche Bank B/H/S: 4/3/1

CSL’s first-half profit met the broker’s forecast, outpacing it on some earnings metrics.

But the broker notes an underlying schizophrenia, strong earnings on the base business being offset by a higher than anticipated ex-Novartis operation loss thanks to weaker sales in the northern hemisphere relating to its QIV vaccine, a problem that could resurface in fiscal 2017.

First half operating results were weaker than Deutsche Bank expected, largely due to the inclusion of the flu vaccination business, which reported a larger operating loss and smaller gain on acquisition compared with guidance.

Profit guidance in the flu business has dropped to a $100m loss from break even in a matter of months.

To the broker, this highlights the unpredictable nature of flu vaccine sales and a high fixed cost structure.

Evolution Mining Limited (EVN) Downgrade to Underperform from Neutral by Credit Suisse and Downgrade to Neutral from Outperform by Macquarie B/H/S: 1/4/1

First half losses were greater than Credit Suisse expected, the miss being amortisation debt establishment costs. Evolution’s underlying result was in line but Macquarie was not expecting write-downs, which took the bottom line to a net loss.

Cash flow was nevertheless strong and in line with expectation and while the dividend was also as forecast, an upgrade is likely ahead, the broker notes.

Henderson Group (HGG) Downgrade to Neutral from Outperform by Credit Suisse B/H/S: 2/2/0

Henderson Group’s fiscal 2015 result beat the broker by 3% thanks largely to a lower tax rate and performance fees. But Credit Suisse downgrades earnings 22% predicting a sharp fall in funds under management following the recent share market spit, lower performance fee margins, negative operational leverage, a higher tax rate and minimal room to cut costs.

Iluka Resources (ILU) Downgrade to Neutral from Buy by UBS B/H/S: 2/4/1

Iluka will suspend mining and concentrate production at Jacinth-Ambrosia. While there will be an increase in charges for idling and rehabilitation the suspension is expected to increase net cash flow.

UBS suspects the market may interpret this as a response to subdued or slowing demand but believes, instead, the announcement reflects a desire to manage and run down the heavy mineral concentrate inventory. Rating is therefore downgraded.

Sonic Healthcare (SHL) Downgrade to Neutral from Outperform by Macquarie B/H/S: 4/2/2

Sonic’s revenue was in line with Macquarie but earnings fell short. International pathology posted a strong result but mostly due to a combination of currency gains, the Swiss acquisition and the new joint venture in the UK, the broker notes.

Domestic businesses delivered declines, with collection centre costs again to blame.

Sonic has nevertheless retained full year guidance and despite ongoing risks surrounding federal budget changes, Macquarie believes the company can weather domestic issues well. But following share price gains the broker sees value as fair, and thus downgrades the stock.

Woodside Petroleum (WPL) Downgrade to Neutral from Buy by UBS B/H/S: 1/7/0

Woodside Petroleum’s full-year result beat consensus despite recording a 53% dive in net profit after tax as average realised prices slumped 36%. But the better-than-expected result was struck on the exclusion of $128 million lease provision from underlying NPAT calculations. Woodside reported a 43c per share dividend, well up on UBS’s forecast 29c, maintaining its 80% payout ratio. However the broker downgrades the stock to reflect the recent share-price rally.

Earnings Forecasts

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